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FCA eyes further regulation on funds investing in illiquid assets

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The FCA is considering further regulation for open-ended funds investing in illiquid assets following the publication of a discussion paper today.

The regulator has launched the discussion following the liquidity issues that arose as investors fled from property funds after the Brexit vote and is looking to enhance market stability, promote competition in the sector and protect consumers, it says.

A key issue is balancing the interests of investors who wish to withdraw their money and those who want to remain invested, which can prove problematic in funds investing in illiquid assets that don’t have daily pricing.

Illiquid assets include land and buildings, infrastructure and financial assets such as unlisted securities. The FCA promotes investment in these assets as offering “the potential to earn strong investment returns in the medium to long term and diversification of portfolio risk”.

FCA executive director of supervision for investment, wholesale and specialist firms Megan Butler says: “This discussion paper is a great opportunity for all stakeholders to think carefully about the management of risk, particularly around redemptions, if investors are looking for a quick exit.

“We want to engage with fund managers and the investors whose money they manage to understand what problems they think exist. Specifically, in the context of open-ended funds we want people to consider how well the current rules address those problems, and what further regulatory intervention might be needed. We look forward to industry and consumers giving us their views and opinions.”

The FCA is asking for feedback on the discussion paper from investment managers, platform providers, financial advisers and discretionary wealth managers as well as individual consumers.

Responses are due by 8 May.

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Comments

There is one comment at the moment, we would love to hear your opinion too.

  1. Illiquid assets shouldn’t be held in open-ended funds at all. There are plenty of closed-end fund solutions (investment trusts etc.) where liquidity is provided for investors by the market at the “market price”. While it’s handy for investors and asset managers to benefit from “flexible” valuation guidelines provided by RICS etc. comparing the notional performance of illiquid assets against the actual performance of liquid assets skews the retail and institutional investment markets, misleads investors and often causes significant problems for investors and the reputation of the industry.

    There are no good reasons for any assets that can’t ordinarily be sold before the next dealing date to be allowable in open-ended funds.

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